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Salary sacrifice – an easy and clever way to boost your super

Is it the odd name that leads people to think that it is all a bit too hard? Or is it maybe a perception that you need to be a high income earner to take advantage of it?

Whatever the reason, the truth is that salary sacrificing is actually quite a simple, accessible and effective way for many working Australians to save on tax while boosting their super nest egg.

While employed people are generally not able to make tax deductible voluntary contributions to their super in the same way as the self-employed, they can still achieve tax benefits through their super by salary sacrificing. All it takes is a little initiative to make an arrangement with your employer to alter your salary package so that some of your pre-tax income is diverted into your super rather than being taken as taxable income in the hand. This creates both a genuine savings on income tax and a welcome shot in the arm to your super.

It’s simpler than you think

The basic premise of salary sacrificing is to channel some of your pre-tax income toward your super, rather than taking it as income. Money flowing to your super is taxed at a maximum rate of 15 per cent, compared to tax on your income which (depending on your level of income) can be as high as 49 per cent. While there is a drop in take home pay, this is more than compensated by an overall reduction in the total tax you pay and a significant boost to your retirement savings. Here’s an example to illustrate how it can work:

No salary sacrifice

With salary sacrifice

Toatal Package

$80,000

$80,000

Super Guarantee contribution

$7,600

$7,600

Salary

$72,400

$72,400

Salary sacrifice

0

$68,400

Income tax payable

$16,525

$15,145

Take home pay

$55,875

$53,255

Total super contribution

$7,600

$11,600

Super contribution tax

$1,140

$1,740

Net super contribution

$6,460

$9,860

Net improvement in overall position

$780

*Calculations for income tax and Super Guarantee Contribution are based on 2016/17 tax year and include Medicare levy.

In this example take home pay is reduced, but when it is combined with the amount going toward building your super the net overall improvement in your position is $780, after all taxes are taken into consideration. But, don’t forget, once your money goes into super, it generally needs to stay there until your reach your preservation age and retire from employment.

Take the initiative

While your employer is no better or worse off as a result of you salary sacrificing into your super, it is not something that they will usually actively promote or suggest to you and you should seek advice from a financial planner before making the decision to salary sacrifice.

Once you decide a salary sacrifice strategy is right for your financial situation, the steps to initiate it are quite straightforward. Firstly, you simply approach your payroll officer to make sure they are happy to enter the arrangement. You then simply decide how much you would like to salary sacrifice and complete a salary sacrifice agreement, which is submitted to your payroll officer to authorise them to divert your requested amount to the super fund you choose. The form will usually be available through the fund into which you want to have the contributions paid.

Part of your overall strategy

Salary sacrificing is one way of accelerating your super tax effectively, but it should always be done as part of an overall retirement savings strategy. It is best to seek advice from a qualified financial planner to make sure that salary sacrificing is appropriate for you and to determine how much you should be allocating toward your super through such an arrangement.

Take the next step

We have an established alliance with Bridges, to provide our customers with financial advice. Bridges has been helping Australians with financial advice for 30 years.

A Bridges financial planner will develop a plan specifically for you; one that’s tailored to your needs and circumstances to help you achieve your goals.

To make an appointment with a Bridges financial planner, call 1300 65 65 81. The initial consultation is complimentary and obligation free.

Bridges Financial Services Pty Ltd (Bridges). ABN 60 003 474 977. ASX Participant. AFSL 240837. Part of the IOOF group This is general advice only and has been prepared without taking into account your particular objectives, financial situation and needs. Before making an investment decision based on this information, you should assess your own circumstances or consult a financial planner or a registered tax agent.
Examples are illustrative only and are subject to the assumptions and qualifications disclosed.
In referring customers to Bridges, Northern Inland Credit Union does not accept responsibility for any acts, omissions or advice of Bridges and its authorised representatives.

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